The liability for a worker depends on whether or not the worker is classified as an employee or an independent contractor. Further, liability can be different at the state and federal level because of differences depending on their status.
What Is the IRS Definition?
First of all, the IRS defines the employer/employee relationship under common law rules. A worker is an employee, if the person for whom he works has the right to direct and control his work both as to the final results and as to the details of when, where and how the work is to be done, regardless of whether control is actually exercised.
The basic factors that exhibit control are whether the employer has the ability to hire and fire the worker.
Basic factors of employer-employee relationship.
Further, the worker must devote full time to the business of the employer. In addition, the relationship between the employer and the worker must be of a continuing nature. Other evidences of control are training and integration of services.
Finally, if the employer provides a place, the tools and means to accomplish the work.
IRS Procedure in Determining Tax Liability
Once an IRS audit for underpayment or nonpayment of taxes is triggered, the IRS will make a determination under the guidelines and common law rules whether or not workers can be considered employees or independent contractors.
If there is a determination that the worker is an independent contractor, then the company has no liability. The IRS looks to the individual worker for payment of applicable taxes.
If there is a determination that the worker is an employee, then the IRS will calculate all outstanding tax withholdings owed. The IRS will permit the company to establish whether the individual worker has paid any such taxes. If such taxes have been paid, the total liability will be reduced by the amount paid. However, the company has the burden of gathering and providing this information to the satisfaction of the IRS.
Liability for State Employee "Head Taxes" (e.g. Unemployment) and Overtime
A company is not responsible for unemployment, compensation or overtime for an independent contractor. Under Illinois law, a temporary service company is responsible for payment of unemployment, compensation, and overtime of a temporary/project contractor unless the contractor was in business for himself and worked for clients other than the company's clients.
Triggering of Other Audits
The filing for a worker's compensation claim or filing for state unemployment relief will often trigger an audit by that agency and may well trigger audits by both the IRS and the state taxing authority regarding withholding issues.
Ownership of Ideas and Inventions of Your Independent Contractors
- By agreement - either the company or the client can have the worker sign an employment contract which will assign their rights to any and all inventions and ideas developed by them.
- By statute - Illinois specifically has a statute which addresses certain aspects of ownership rights vis-a-vis an employer and employee and inventions invented by the employee. Other states have similar statutes.
- Caveat - Since assignment documents are usually used by employers in an employment situation, independent contractors are not usually asked to execute these documents because of the implicit admission by the employer that the worker is not really independent but is in fact an employee. Therefore, a specialized document between an employer and an independent contractor will be critical especially in the high tech area where customized work is being done for the employer's client.
Liability for the Acts of an Independent Contractor v. Employee
Independent Contractor Liability
An independent contractor is responsible for any liability caused by the contractor. Normally, independent contractors will agree to defend, indemnify and hold harmless the company and should require this indemnity with liability insurance which names the temporary agency as an additional insured. This insurance should be addressed through a written agreement between the company and the independent contractor.
Employee
Through the legal doctrine of respondeat superior, an employer will always be held liable for acts of the employee committed within the scope of the employment.
In Conclusion
There are important differences between an employee and an independent contractor which govern the tax and employment law liabilities. It is important that employers make clear the status of independent contractors to the worker. Further, the employer needs to abide by the guidelines as well to prevent a possible determination that the independent contractor is in reality an employee.